The Role of the G20 in Enhancing Financial Inclusion The nine principles articulate a role for government that consists primarily in creating an enabling policy environment for market-based

I

Introduction

Research has shown that greater access to finance is crucial to reducing poverty and inequal-

ity. Yet most households and firms in developing countries are excluded from access to financial

services. The G20’s initiative on enhancing financial inclusion thus recognizes a long-neglected

problem, particularly in developing countries. It also identifies a number of policy prescriptions

to make financial services more accessible to the great majority of households and firms. These

rely primarily on improving the financial infrastructure and building the capacity of existing ser-

vice providers, principally microfinance institutions (MFIs) and commercial banks. However, by

themselves these prescriptions are insufficient and will not succeed in meeting their objectives.

More inclusive finance will also require a more active role by government agencies and programs

to complement the efforts of MFIs and private banks. It will additionally require innovative ideas

and policies to ensure that small and medium enterprises, which tend to be significantly under-

served by financial markets, obtain greater access to credit and other financial services.

CGAP: Prelude to the G20’s Financial Inclusion Initiative

The issue of financial inclusion is not new. In the 1980s, Grameen Bank pioneered the innova-

tion of microcredit for the poor in Bangladesh. Simply put, microcredit made services available

to poor households (and particularly women) that commercial lenders were unable to offer on a

profitable basis and that traditional moneylenders were willing to provide only at usurious rates

of interest. But the business model for the first generation of microcredit depended on donor

funding, indicating that microcredit was not a commercially sustainable venture. However donors

were appreciative because high loan repayment rates meant that grants could be recycled to

several rounds of beneficiary borrowers.

The replication of the Grameen model all over the developing world thus attracted con-

siderable donor support. By the 1990s, microcredit became a favoured policy instrument in the

fight against poverty. The fact that women in poor households were the principal beneficiaries of

The Role of the G20 in Enhancing Financial Inclusion

By Roy Culpeper, Senior Fellow, School of International Development and Global StudiesUniversity of Ottawa

February 2012

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microcredit also supported the emphasis of many donors on enhancing gender equality in their

development programs.

By the mid-1990s donors were keen to systematize lessons learned and best practices

from the first decade of microcredit. Following the precedent of the Consultative Group for

International Agricultural Research (CGIAR),1 a core group of donors came together in 1995

to create the Consultative Group to Assist the Poor (CGAP)—a bit of a misnomer in the sense

that it has a rather narrowly defined mandate as to how it assists the poor. Its specific focus is

to assist the poor through the provision of microfinance. It also provides advisory and technical

services, guidelines and standards, training, funding for innovation, research, and knowledge dis-

semination. It serves three major client groups: financial service providers who serve low-income

people; funding organizations; and governments.

CGAP is an independent entity with a membership comprising 16 donor countries, 11

multilateral development organizations, and five private foundations. Each of these is repre-

sented on the Governing Council. There is a close working relationship with the World Bank,

which provides office premises in Washington.

Much of the G20’s thinking about financial inclusion has sprouted from the work of CGAP

in the past 16 years — its technical assistance, policy work and research. Moreover, as explained

below, CGAP is one of the three key implementing agencies for the G20’s initiative.

Key Role of the Gates Foundation

In addition to CGAP, the Bill and Melinda Gates Foundation has played a key role in shaping the

discussion on financial inclusion. Since 1994 the Foundation has provided some $26,194,000,000

in grants in three principal programs: global development ($3.6 billion), global health ($15.3 bil-

lion), and activities in the United States ($6.2 billion).

The Foundation’s grant-making in the global development program focuses on six main

areas: agricultural development; financial services for the poor; water, sanitation and hygiene;

global libraries; special initiatives; and policy and advocacy. In 2010 one-half (or $242 million)

of the grants in global development was allocated to agricultural development, and one-sixth (or

$81 million) to financial services for the poor, the second largest area.

The goal of the Foundation’s activities in the area of financial services for the poor is

“to provide millions of poor people in the developing world with reliable access to affordable

financial services to help them build better, healthier lives:” in other words, to enhance financial

inclusion. Since 2006, the Foundation has committed more than $500 million to explore ways

to increase financial services. It has emphasized three main priorities: savings products (e.g.

“no-frills” affordable bank accounts for the poor); delivery channels (e.g. mobile telephone and

branchless banking); and policy to support safe financial services to the poor.

Of principal interest in the context of this paper is the Foundation’s support to two imple-

menting agencies for the G20’s initiative on financial inclusion: CGAP, described above, and the

Alliance for Financial Inclusion. The Foundation’s 2010 Strategy Brief lists grants in the “policy”

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area of $35 million to AFI and $23.8 million to CGAP. However, its support of policy, research

and advocacy for financial inclusion goes considerably beyond these two organizations. For exam-

ple, recipients in 2010 included New York University ($2 million), Yale University ($7 million),

University of California Irvine ($4 million), and the United Nations Capital Development Fund

($1 million). In 2006 the Foundation launched the Financial Access Initiative, a consortium of

development economists focused on substantially expanding access to quality financial services

for low-income individuals, with a grant of $5 million. Housed at New York University, the initia-

tive engages in research and in the policy and regulatory debates on enhancing financial access,

particularly for the poor.

In brief, while the Gates Foundation has allocated a relatively small portion of its resources

to financial services for the poor, it has helped to shape current ideas about financial inclusion

through its support of research and action aimed at providing the poor greater access to financial

services. It has put priority on savings products and market-friendly, innovative technologies.

The G20’s Initiative on Financial Inclusion

Background. The Group of 20 finance ministers was originally convened to deal with the Asian

financial crisis of 1997-98. The G20 met at the level of heads of government for the first time in

November 2008 at the invitation of President Bush to coordinate a global response to the much

more serious financial crisis that first erupted in the United States in the summer of 2007.

Although the G20’s initiative on enhancing financial inclusion was put on the agenda in

November 2008 and formally launched at its Pittsburgh meeting in September 2009, its roots

predated the crisis. By the middle of the decade financial liberalization policies undertaken by

many developing and emerging market countries had put an end to “financial repression.”2 How-

ever, while such policies remedied many of the problems of mismanagement and corruption in

the financial sector it did not succeed in increasing access by households and firms to financial

services. Indeed, financial liberalization led to the withdrawal of services to the poor and to rural

areas to the extent these had been provided by state-owned banks that were wound down by the

reforms.

Despite the reforms, in most developing countries a majority of households and smaller

enterprises continued to be excluded from the formal financial sector. Almost 70 percent of the

adult population in developing countries, or 2.7 billion people, lack access to basic financial

services, such as savings or checking accounts. The regions with the largest share of unbanked

populations are Sub-Saharan Africa, where only 12 percent are banked, and South Asia, with 24

percent banked.

Accordingly, even before the current financial crisis erupted, the need to enhance finan-

cial inclusion was recognized by the United Nations and the World Bank as a neglected issue

that required urgent policy attention. When the G20 leaders began to meet after November

2008, enhancing financial inclusion in developing and emerging market countries was put on

the agenda. Although developing and emerging market countries were not at the epicenter of

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the crisis, and financial exclusion was not a contributory factor, the G20’s initiative can best be

understood as part of a global strategy aimed at remedying the failures of liberalized financial

markets. In the industrial countries the strategy consisted of strengthening regulation and the

capitalization of banks not only to curb the financial instability that had triggered the crisis, but

also to heighten consumer protection. In developing and emerging market countries, rather than

tackling the financial crisis per se, the strategy addressed financial inclusion as part of a renewed

development agenda. In other words, G20 leaders recognized the mutually reinforcing policy

objectives of financial stability, financial inclusion and consumer protection.

Launch of the Financial Inclusion Initiative: 2008-2010. At its Pittsburgh meeting in

September 2009, the G20 convened a Financial Inclusion Experts Group (FIEG) to recommend

how to expand access to finance for households and micro-, small- and medium –sized enter-

prises. Two sub-groups were formed to undertake further analysis, one on Small- and Medium-

sized Enterprise (SME) Finance, and one on Access through Innovation. The focus of the latter

sub-group was on innovative methods — for example mobile telephones — to improve access to

financial services. Such technology, it was believed, can reduce costs and overcome other barriers

to the provision of sustainable financial services to the excluded.

The SME Finance sub-group was supported by the International Finance Corporation

(IFC) of the World Bank Group. The Access through Innovation sub-group was supported by the

Consultative Group to Assist the Poor (CGAP). In addition to CGAP and IFC, a third organiza-

tion, the Alliance for Financial Inclusion (AFI),3 has been a key implementing partner for the

G20 financial inclusion agenda. These three organizations — IFC, CGAP and AFI — have sub-

sequently done most of the substantive research and policy analysis for the G20 initiative. Due

to the close relationship between IFC, CGAP and the World Bank Group, the frame of reference

for this work is heavily dominated by the accumulated body of research and thinking of the World

Bank4, particularly its Finance and Private Sector research group.

The organizational structure of the G20 initiative has evolved and become more com-

plex since its launch. Its major milestones have included articulating a set of nine principles to

guide governments that seek to make financial services more inclusive (Box 1). The nine prin-

ciples (henceforth, the “G20 Principles for Innovative Financial Inclusion”) were endorsed at the

Toronto G20 Summit meeting in June 2010.

Box 1: The G20 Principles for Financial Inclusion

One of the first products of the FIEG sub-group on Access through Innovation was the devel-

opment of a set of nine principles to inform future strategies to enhance financial inclusion:

Leadership. Cultivate a broad-based government commitment to financial inclusion to

help alleviate poverty;

Diversity. Implement policy approaches that promote competition and provide mar-

ket-based incentives for delivery of sustainable financial access and usage of a broad range of

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The nine principles articulate a role for government that consists primarily in creating an

enabling policy environment for market-based actors. While a direct role in enhancing financial

inclusion for public agencies or programs is not ruled out, such a role does not emerge explicitly

as part of the policy framework to be considered by governments. Specifically, public agencies

such as postal savings banks and national development banks, or government programs such as

credit guarantees (on private-sector lending) play an important role in providing financial access

in many countries, both developing and developed. “Leadership” (the first of the nine principles)

should explicitly include direct intervention by government to enhance inclusion, building upon

the best practices of existing government agencies and public-sector programs.

The Toronto meeting of the G20 launched two further initiatives, the “SME Finance

Challenge” (Box 2) and the “Financial Inclusion Action Plan.”

affordable services (savings, credit, payments and transfers, insurance) as well as a diversity

of service providers;

Innovation. Promote technological and institutional innovation as a means to expand

financial system access and usage, including by addressing infrastructure weaknesses;

Protection. Encourage a comprehensive approach to consumer protection that rec-

ognizes the roles of government, providers and consumers;

Empowerment. Develop financial literacy and financial capability;

Cooperation. Create an institutional environment with clear lines of accountability

and co-ordination within government; and also encourage partnerships and direct consulta-

tion across government, business and other stakeholders;

Knowledge. Utilize improved data to make evidence based policy, measure progress,

and consider an incremental “test and learn” approach acceptable to both regulator and

service provider;

Proportionality. Build a policy and regulatory framework that is proportionate with

the risks and benefits involved in such innovative products and services and is based on an

understanding of the gaps and barriers in existing regulation; and

Framework. Consider the following in the regulatory framework, reflecting inter-

national standards, national circumstances and support for a competitive landscape: an

appropriate, flexible, risk-based Anti-Money Laundering and Combating the Financing of

Terrorism (AML/CFT) regime; conditions for the use of agents as a customer interface;

a clear regulatory regime for electronically stored value; and market-based incentives to

achieve the long-term goal of broad interoperability and interconnection.

We are told that these principles are drawn from the experiences of various coun-

tries that have succeeded in increasing financial inclusion. They are not “meant to be rigid

requirements.” Instead, they are meant to guide developing country governments in adopting

policies “that spur innovation for financial inclusion while safeguarding financial stability

and protecting consumers.”5

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Box 2: SME Finance Challenge

The SME Finance Challenge was launched in collaboration with Ashoka Changemakers6

and with the support of the Rockefeller Foundation. It was announced as “a unique financial

inclusion effort aimed at giving small entrepreneurs a chance to grow their business.” The

Challenge took the form of a “competition that is asking the private sector to identify path-

breaking models that make public programs more effective in leveraging private finance.”

Private financial institutions, investors, companies, foundations and civil society organiza-

tions were all invited to submit proposals. Successful entries were to demonstrate: innova-

tion, leverage, scalability, social and economic impact, and sustainability.7

Some $528 million in funding for the Challenge was committed by South Korea, The

United States, Canada and the Inter-American Development Bank (additional pledges were

made by others subsequently). The form of funding provided to the winning proposals was to

vary “based on their individual requirements, and may include grants for technical assistance

or capacity-building, risk sharing or first-loss capital, mezzanine capital, and investment cap-

ital.” There were 356 entries. The competition was adjudicated at the following G20 Summit

held in Seoul, Korea, where the 14 prizewinning entries were announced. The winners were

subsequently connected with donors and investors at an SME conference in Cologne, Ger-

many (November 15-16).

While the SME Finance Challenge served to showcase a few captivating small busi-

ness ideas that needed financing, it diverted attention from the fact that the problem of SME

financing is a systemic one, requiring systemic solutions. A $500-million contest with 14

prizewinners pales in comparison with the estimated order of magnitude of required SME

financing (at least $2.1 trillion) by some 365 million SMEs, according to a report prepared

for the SME Financing sub-group.8 Yet the contest illustrated a bias of the G20 initiative,

namely the notion that the failure of financial markets to be more inclusive can be overcome

by highlighting compelling examples of unmet needs.

The Financial Inclusion Action Plan9 built upon the reports of its two sub-groups, “Innovative

Financial Inclusion: Principles and Report of the Access through Innovation Sub-Group”10, and

“Scaling-Up SME Access to Financial Services in the Developing World”11 by the SME Finance

Sub-Group. These two reports, along with a third resulting from a collaboration between IFC and

McKinsey & Company12, constituted the core documents for consideration at the November 2010

G20 Summit in Seoul. There were seven main items in the Action Plan:

1. Commitment to implement the G20 Principles for Innovative Financial Inclusion under a

shared vision of universal access;

2. Encourage Standard Setting Bodies (SSBs)13 to support financial inclusion and to fur-

ther explore coordinated information sharing on the complementarities between financial

inclusion and their own mandates;

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3. Work with the private sector to increase access to financial services, consistent with the

G20 Principles for Innovative Financial Inclusion;

4. Improve the quality of measurement and data on financial inclusion of households/indi-

viduals and Micro, Small and Medium Enterprises;

5. Support capacity-building and training;

6. Improve national, regional and international coordination; and

7. Integrate Financial Inclusion into all types of Financial System Assessments.

The Action Plan also called for a “Global Partnership for Financial Inclusion,” a consulta-

tive mechanism that would include non-G20 countries and other stakeholders to maximize the

impact of the G20’s work. And it called for the mobilization of funding for financial inclusion.

The latter sought in the first instance to identify funding for the SME Finance Challenge and

increased demand for technical support.

The Action Plan goes beyond the Principles in calling upon international bodies—the standard-setting bodies and the international financial institutions—to incorporate financial inclusion into their mandates. However, it echoes the Principles in calling for governments prin-

cipally to create an enabling environment for the private sector and for individuals, households,

and SMEs. Like the Principles, the Action Plan is silent on the potentially significant role of

government agencies and programs.

Indeed, the report on “Scaling-up SME Access to Financial Services” clearly expresses

its reservations about government support mechanisms, despite acknowledging (with several

illustrations) that such interventions are commonplace in both developing and developed coun-

tries, and that they “can significantly expand the SME finance space.” The report warns that “it

is always important…to minimize their market distorting consequences.” As for state banks, it

states that, “For countries that do not already have such institutions, this report does not recom-

mend the creation of new state banks to serve the SME market.” In contrast it gives lukewarm

support to partial guarantee schemes, while recommending an initiative aimed at helping devel-

oping countries minimize their subsidy component.14

Accomplishments at the 2010 Seoul Summit and 2011 Cannes Summit. At its Summit

meeting in Seoul, the G20 adopted the Action Plan proposed by the FIEG. It also committed

to launch the key implementation mechanisms for the Action Plan: the Global Partnership for

Financial Inclusion (GPFI), and an SME Finance Innovation Fund, to be structured and facili-

tated by IFC15 and coordinated by Canada. The fund was to support the SME Challenge prizewin-

ners “and other models focused on improving finance for SMEs.”16

At Seoul, financial Inclusion was not only prominently included in the Leaders’ Declara-

tion, but was also highlighted as an important component under the Seoul Development Consen-

sus and the financial sector reform agenda. The Seoul Development Consensus included, among

other things, a Multi-Year Action Plan on Development.17 This set out nine pillars of action on

global development,18 among them financial inclusion.

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At the Seoul G20 Summit the G20’s work on financial inclusion was entrusted to the

GPFI (officially launched on December 10, 2010), which has a mandate to reach beyond the

membership of the G20 to non-G20 (particularly low-income) countries as well as other stake-

holders. (The GPFI effectively superseded the former Financial Inclusion Experts Group.) The

co-chairs of GPFI were the “troika” — the past, present and future G20 Chairs — thus Korea,

France, and Mexico. At Seoul three new sub-groups were created: (1) Principles for Innovative

Financial Inclusion and Standard Setting Bodies (SSBs) Engagement (co-chaired by Korea and

Indonesia); (2) SME Finance (co-chaired by Germany, Turkey, the UK and the US), and (3)

Financial Inclusion Data and Measurement (co-chaired by Mexico, France and South Africa). The

sub-groups were also associated with non-G20 partners and supported by the three implementing

agencies that have been involved with the G20 initiative from the outset, viz. AFI, CGAP and IFC

(see Table 1).

Table 1: Structure of the GPFI

Overall Co-Chairs: France, Korea, Mexico

Sub-group on

Korea

Indonesia

Germany

United Kingdom

United States

Turkey

Mexico

France

South Africa

Principles and SSBs SME Finance Data & Measurements

Co-chairs

Source: Global Partnership for Financial Inclusion. “Workplan for 2011-2012.”

The GPFI was tasked at Seoul with reporting on its work to the next G20 Leaders’ Summit at

Cannes, France in November 2011.

During 2011 the three new sub-groups generated a number of activities and seven publi-

cations. These included:

• areportontheengagementwithstandard-settingbodiesbyfivecountries:Brazil,Kenya,

Mexico, the Philippines, and South Africa

• areportontheglobalstandard-settingbodies19 and financial inclusion for the poor

• areportonimplementingtheG20PrinciplesforInnovativeFinancialInclusion

• apolicyguideonSMEfinance

Non-G20 Partners Kenya

Phillipines

Peru

Nigeria

Malaysia

Netherlands

Netherlands

Thailand

Implementing Partners AFI

CGAP

IFC AFI

CGAP

IFC

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• areportonfinancialaccessbyagriculturalSMEs

• areportonfinancialaccessbywomen-ownedSMEs

• adiscussionpaperreviewingtheadequacyoffinancialinclusiondata

The achievements of the three sub-groups were showcased at the first GPFI Forum held

at Riviera Maya, Mexico, on October 1, 2011. The forum was opened by Mexican President

Felipe Calderon and featured an address by HRH Princess Maxima of the Netherlands, who was

appointed the UN Secretary-General’s Special Advocate for Inclusive Finance for Development.

This event followed the third Global Policy Forum convened by the Alliance for Financial Inclu-

sion, also held at Riviera Maya. As Mexico is assuming the Presidency of the G20 in 2012, the

venue for the forum is an indication of the priority accorded by Mexico to the issue of financial

inclusion.

At the Cannes G20 Summit in November 2011, the GPFI presented its first progress

report. It recommended that G20 Leaders:

• committofurtherimplementationoftheninePrinciplesforInnovativeFinancialInclusion;

• calluponthestandard-settingbodiestostrengthenthecomplementarityof theirwork

with that of the GPFI;

• launchanSMEFinanceforumasaplatform,hostedbyIFC,andacknowledgeaccessto

finance by women-owned SMEs and by SMEs n the agricultural sector as critical for job

creation and sustainable growth;

• buildontheSMEFinanceChallengetoscaleupsuccessfulSMEfinancingmodels;and

• requesttheIMFtostrengthenitsSMEdata-collectioneffortsandencouragecountriesto

develop and use data sources that are relevant for monitoring policy success.

These recommendations were endorsed in the Cannes Summit Declaration.

Decoding the G20 Financial Inclusion Initiative: A Constructive Critique

Pros and Cons

There is much to be welcomed in the G20 initiative. On the positive side, greater financial inclu-

sion has been absent from the development agenda, and certainly deserves more attention. The

research undertaken for the initiative, and for that matter undertaken prior to the launch of the

G20 in 2008, has certainly contributed to our knowledge about and appreciation of why greater

financial inclusion is important for development.

It has heightened the appreciation of financial inclusion among policy-makers, practitio-

ners, and global standard-setting bodies such as the Basel Committee for Banking Supervision. A

new forum, the Alliance for Financial Inclusion, with members from central banks, finance min-

istries and regulatory agencies in over 70 developing countries, has been created to share expe-

riences and learn from best practices. The initiative has served to reinforce access by the poor

to savings facilities and other financial services than credit (for example, insurance). With the

X

arrival of mobile telephone banking and other versions of “branchless banking”, new technolo-

gies have enhanced the possibilities of maintaining safe and dependable bank accounts for poor

households. The G20 initiative has welcomed these innovations but has appropriately emphasized

the need to put in place adequate regulatory and supervisory systems to protect consumers and

depositors against possible abuses. Perhaps most significantly it has drawn attention to the huge

financing gap for SMEs, straddling the “missing middle” ground between MFIs — for which

SMEs’ financial needs are too large and complex — and commercial banks — for which SMEs

are too small and risky.

However, there are two drawbacks. First, there is a danger that greater financial inclu-

sion may be given undue weight by development practitioners, similar to the emphasis given to

microcredit (or social sector investment, or structural adjustment) in the past. Or equivalently,

there may be excessive expectations about what greater inclusion can realistically achieve. Like

any other important ingredient in development strategy — education and health in the past, or

physical infrastructure and food security in the Seoul Development Consensus — it is essential to

remember that all these ingredients are important and complementary, and the requisite mea-

sure of each is very specific to the context in every developing country.

The second, more serious drawback relates to what is downplayed in the G20 initia-

tive: principally, the role of government, or the public sector more generally. The overwhelming

emphasis in the initiative is that the state should create and maintain an “enabling environment”

within which the private sector can flourish in providing financial services more inclusively. A

more active role for the public sector than that envisaged by the G20 initiative, in the direct or

indirect provision of financial services, is not only warranted; it also reflects an inescapable real-

ity in a number of countries, whether developing, emerging markets, or industrial. But there is

a distinct bias in the G20 initiative in favour of a greater role for private markets and a more

circumscribed role for government agencies and programs providing direct financial services.

Financial Liberalization and Banking Crises

To interpret the G20 initiative, it is important to situate it in its historical and policy context.

First, it is clear that the issue of financial inclusion emerged as a development issue long before

the Great Financial Crisis that erupted in 2007 and continues to roil the industrial world. Indeed,

the issue of financial inclusion is independent of and distinct from much of the discussion on the

interrelationship between finance and development, which has focused largely on policies toward

the formal financial sector. That discussion, or debate, which emerged in the 1970s, dwelt on

the need to end financial repression (government ownership and control of the financial sector)

through liberalization and privatization measures. It was felt that, by liberalizing the sector,

finance would be allocated more efficiently to users and borrowers who would maximize returns

on their investment, providing a significant boost to economic growth.

The problem is that liberalized financial sectors did not quite work in this way. In the

1980s, the financial sector did not become an engine of growth. Instead it became an engine of

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instability. Financial liberalization, particularly when accompanied by capital account liberaliza-

tion, led to a series of debilitating banking and debt crises that reversed economic growth in

many developing and developed countries. In the 1980s and mid-90s, the focus of these crises

was predominantly in Latin America. In the late 1990s, the financial crisis erupted in East Asia

before spreading to Russia, Brazil and Argentina. As a result, the policy debate on the financial

sector became predominantly one about the speed and sequencing of liberalization, accompanied

by the need to put in place adequate regulation and supervision. With the Great Financial Crisis

of 2007, the focus of the debate shifted to the United States and Europe.

Moreover, financial sector liberalization also resulted in the retrenchment of public banks

and other institutions formerly offering financial services to the poor or to rural areas. Where

these had been served at all, it was more typically by state-owned or –controlled banks, down-

sized or privatized by reforms. Meanwhile liberalized banks found little or no profit in serving

low-income clients or regions, preferring a clientele comprising elites, governments and large

firms and the urban areas. Thus it is quite conceivable that liberalization reforms led to even

greater financial exclusion for the poor and disadvantaged regions of developing countries.20

The Rise of Microcredit

The issue of the contribution of the financial sector to more basic development objectives—for

instance, in stimulating growth and reducing poverty — took a back seat to the objective of finan-

cial stability in research and policy discussions. It was left to practitioners such as Muhammad

Yunus and the Grameen Bank — to explore and innovate new pathways for finance in developing

countries. The arrival of microcredit and microfinance infused the discussions with new vigour

and helped to reorient financial policy toward the basic discussions about growth and poverty

reduction. It also coincided with a renewed focus by donors on poverty reduction as the pre-

eminent objective of foreign aid, and a growing emphasis on gender equality as a critical dimen-

sion of aid effectiveness. Not surprisingly some donors felt that microcredit was one of the most

effective ways of delivering aid directly to the poor, and particularly poor women. So when donors

decided in the mid-1990s to make a concerted effort to distill best practices and lessons learned

from microcredit, they chose the designation of the Consultative Group “to Assist the Poor.”

Despite the proliferation of microcredit institutions, however, it had become apparent

by 2000 that the penetration of such institutions among the poor and in rural areas was modest

at best. As a result, low-income clients and regions remained largely excluded from access to

financial services, whether through the formal or semi-formal (i.e. microcredit) sector. Moreover,

a second generation of microcredit institutions heralded problems and weaknesses that were not

so apparent or widespread in the first generation: mismanagement, corruption, or arduous terms

and chronic indebtedness for borrowers. Most sobering of all was growing evidence suggesting

that microfinance does not contribute significantly to poverty reduction.21

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Evidence on Financial Exclusion

The crucial fact is that both semi-formal22 microfinancial institutions and the formal financial

sector banks (whether public or private) failed to reach a large majority of the population in

developing countries, including most of its small- and medium-sized enterprises. By the turn of

the century, recognition of this market failure led to a growing belief that efforts were needed

to enhance financial inclusion. These were rooted in a growing body of research that showed that

greater access to financial services (not just microfinance) contributes to reducing poverty and

inequality, although the impact is, as indicated, at best indirect. Essentially finance facilitates

greater inclusion of the population in the formal economy and higher wages. The evidence sug-

gested that direct provision of financial services to the poor was not the most important channel

for reducing poverty and inequality.23 This research helped to frame the issue of financial inclu-

sion which emerged explicitly in the mid-2000s in discussions and reports at the United Nations

and the World Bank.

However, by the time explicit recognition was given to the issue, and before a policy

consensus could be formed as to measures to be undertaken, the Great Financial Crisis of 2007

erupted. Once again the focus of attention shifted to the epicenter of the crisis, this time the

United States, the United Kingdom, and other European countries.

Rise of the Emerging Market Countries

The Great Financial Crisis coincided with a shift in the geo-economic balance of power. A decade

earlier, the G7 countries had commanded a sufficiently large share of world output and trade

that they could effectively shape the policy environment through the global economic institutions.

Although the G20 was first convened during the Asian financial crisis in 1998, it met only at the

level of Finance Ministers. And it could be said that the non-G7 members of the G20 were in

attendance to affirm, not to challenge, the decisions of the G7.

The world was quite different when the G20 first met at the level of Leaders of Govern-

ment in Washington in November 2008. The support of the non-G7 countries — the Emerging

Market members in particular — was crucial in addressing the global crisis, and this time it could

not be taken for granted. However, the first two meetings (the second took place in London in

April 2009) were focused primarily on arresting the short-term dimensions of the crisis through

monetary and fiscal intervention.

At the third G20 meeting in Pittsburgh in September 2009, however, the issue of finan-

cial inclusion was on the agenda, marking the beginning of the G20 initiative. This was the only

“development” item on the agenda. In Toronto in June 2010 the G20 Development Working

Group was established which led in November 2010 at the Seoul Summit to the broadening of

the development agenda. The “Seoul Development Consensus” was a multi-year, multi-pronged

action plan, in which enhancing financial inclusion was one of nine pillars.

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In other words, the issue of financial inclusion may be regarded as a key entry point for

the non-G7, developing and emerging market members for broadening the G20 agenda to accom-

modate longer-term issues of importance to developing countries. By the time of the Seoul meet-

ing financial inclusion was also recognized as part of a financial reform agenda that encompassed

the concerns of developing countries beyond the short-term issues of safety and stability of the

financial sector prompted by recurring financial crises. Moreover, since the crisis that brought the

G20 Leaders together for the first time was centered in the U.S. and E.U., the broader financial

reform agenda clearly addressed issues beyond the industrial countries, issues of vital interest to

the G20 emerging markets and developing countries.

Beyond Microfinance to SMEs

At the same time, the conceptual framework for the emerging debate on financial inclusion

was also being broadened beyond microfinance. Focused primarily on poor households and poor

women in particular, microfinance was frequently rationalized on the basis of “household enter-

prises”. But the reality was that such “micro-enterprises” rarely employed anyone beyond the

household or the primary recipient of microcredit. A more accurate description of such activity

would be “self-employment.” A target narrowly confined to the household misses the huge poten-

tial of smaller and medium-sized enterprises that provide employment to large numbers of poor

households.

In other words, it was recognized that SMEs were in the “missing middle”: too large for

conventional microfinance, and too small and risky for conventional commercial banks. The addi-

tion of a second track in the G20 initiative focused on SMEs acknowledged that more inclusive

finance could benefit poor households indirectly, and perhaps even more powerfully, by providing

employment opportunities in new or growing SMEs. So the shortcoming of earlier attempts to

enhance financial inclusion, focused entirely on lending to households, was acknowledged and

addressed by the G20.

The conceptual framework was also broadened to include the savings needs poor house-

holds. The first generation of microfinance institutions was primarily focused on provision of

micro-credit. The second generation realized that the financial needs of poor households go

beyond affordable credit. Research (including that supported by the Gates Foundation) has

shown that poor households greatly value access to safe and dependable facilities to help man-

age their money.24 But as with credit facilities, the provision of savings facilities involving very

small deposits was challenging for conventional banks. The cost of providing savings facilities for

poor customers made such services unprofitable, so conventional banks either did not provide

them or they stipulated minimum deposit requirements that were beyond the reach of almost all

poor households. And microfinance institutions were focused on providing credit, although by the

1990s, the Grameen Bank and other mature MFIs were offering savings facilities as well.

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Potential of New Technology

However, even conventional banks were changing, spurred by communications technology and

mobile/cellular telephone technology in particular. Such innovations radically transformed the

provision of savings and depositary services by reducing costs and overheads. The G20’s first track

on “innovative finance” acknowledged that more inclusive finance must also include greater

access to savings made increasingly possible by the new technology. Access to savings facilities

is also one of the key priorities of the Gates Foundation’s grant-making in the area of financial

services for the poor.

Summing up so far, the G20 initiative may be interpreted as a recognition by the G7

industrial countries that the widespread lack of access in the developing world is a significant

financial market failure apart from financial instability and vulnerability to crisis. Related to this,

the initiative recognizes financial inclusion both as part of a wider agenda of financial reform

in the wake of the crisis, as well as part of a development agenda that the G20 developing and

emerging market country members are advocating.

Is Finance a Basic Human Need?

That said, it may be worth raising some larger questions about the way in which universal finan-

cial inclusion is being propounded by the G20. “Financial access for all”25 seems to put finance

on the same level as access to education (e.g. the “Education for All” initiative in the 1990s)

and health as a policy objective. Unlike education and health, greater access to finance was not

among the Millennium Development Goals. However, access to basic education and health may

be regarded as fundamental development objectives in their own right. The MDGs, and earlier,

the Human Development Index, recognized the need to elevate education and health levels to

complement the more traditional goal of elevating material well-being (measured by income per

capita) as fundamental goals of development.

On the other hand, access to finance (or financial inclusion) is certainly important to

facilitate the material well-being of the poor. Better education and health may be regarded as

ultimate development objectives, or ends in themselves, as well as a means toward improved

well-being, while financial inclusion may be regarded principally as a means toward improved

well-being rather than an end in itself. For example, access by poor households to credit and

savings facilities may help in providing income-earning opportunities (in the case of credit) or

consumption-smoothing (in the case of access to savings facilities). Access by SMEs to finance

may be an even more powerful pathway to income-earning opportunities, principally through

creating employment opportunities on a large scale.

Access to finance is undoubtedly an important means to these ultimate ends. But it may

not be the only means. For example, financing may indeed be a constraint on the establishment

or growth of SMEs, but it is not the only constraint. Infrastructure (affordable and dependable

electricity and transportation) and access to markets (domestic and foreign) are also critical to

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the viability of SMEs. So is education—both for workers (literate and numerate workers are

more employable) and for management (business acumen is important).

Or is Finance a Utility?

In other words, finance may be better regarded as a utility like electric power or transportation,

which facilitates other more fundamental development objectives captured by indicators such as

income or employment.26 Moreover, it is quite possible for finance to be “a bad” rather than “a

good” if it is used to excess or provided under unsustainable terms. The most obvious example is

excess indebtedness, causing hardship not only for borrowers but conceivably for lenders and the

financial sector as a whole as well. The phenomenon of sub-prime mortgages underlying the crisis

in industrial countries is a case of finance that became “too inclusive.” Finance for all under some

circumstances may lead to outcomes that are not desirable.

To be fair, the issue of financial consumer protection is an integral part of the G20 initia-

tive (it is one of the principles approved in the G20 framework). And two of the G20 Principles

for Financial Inclusion relate to getting the regulatory framework right. Indeed one reading of

the G20 initiative is that it advocates building the “financial infrastructure” in such a way as to

ensure maximum inclusion.

Role of the Public Sector

Finally the G20 initiative has a distinct, if somewhat less than explicit, bias against public sector

institutions and programs. The thrust of the conclusions and recommendations emerging from

the work of the sub-groups is that private sector institutions work best. The sub-group on SME

financing suggests that demands for financing SMEs can best be met through “upscaling micro-

finance institutions and downscaling commercial banks.” (In this context “upscaling” refers to

increasing the capacity of MFIs to deal with larger, longer-term loans suitable for SMEs, and

“downscaling” refers to increasing the flexibility of commercial banks to be able to provide

smaller loans to riskier SMEs.) The role of government is seen as important more in establishing

an enabling environment rather than in providing financial services directly (e.g. through national

development banks) or indirectly (via credit guarantees).

There is no question that the government’s role must include creating an environment —

or financial infrastructure — that will help financial markets to operate more fairly, effectively

and transparently. But in principle, governments could also provide financial services directly,

either in co-operation or in competition with the private sector. If liberalized markets have failed

to provide services to all those needing them, there is a rationale for government intervention to

correct the market failure.

Indeed, many governments both in industrial and developing countries maintain a direct

or indirect presence in financial markets through state-owned lending institutions and/or credit

guarantee programs. However, in many developing countries, such institutions and programs were

XVI

associated with financial repression and many were swept away by liberalization reforms in the

1980s and 1990s.

It is true that the track-record of many state-owned banks and credit programs is mixed.

There have been instances of mismanagement, inefficiency or corruption, and even where such

problems were not rife, and despite attempts to be inclusive, the level of access to financial

services was not a lot higher. Nonetheless, the fact is that in many industrial and developing

countries such government-run institutions and programs continue to exist, despite widespread

financial sector liberalization, and in some countries they play a vital economic and social role.27

In Asia and Latin America, national development banks, guaranteed credit programs and

other public-sector initiatives are either the dominant players in the financial markets or sig-

nificant participants. It is inconceivable that these countries could enhance financial inclusion

without the active participation of these state-owned or –controlled agencies and programs.

In industrial countries public sector financial institutions and programs have existed for

decades in the United States, the Small Business Administration (created in 1953) provides

SMEs with access to capital, access to federal government procurement, and education and tech-

nical assistance for entrepreneurs, among other things. The mission of the Business Development

Bank of Canada is to “help create and develop Canadian businesses through financing, venture

capital and consulting services, with a focus on small and medium-sized enterprises (SMEs)”.

Most industrial and emerging market countries have similar institutions whose ongoing existence

reflects the failure of private financial markets to adequately serve the needs of startup or exist-

ing SMEs.

There are also other examples of institutions that are not privately owned, or state-

owned by the central government, but are community-based or co-operatives. In Germany, the

Sparkassen Finanzgruppe (Savings Banks Finance Group) has existed for 250 years with a man-

date to serve lower-income residents — thus practicing financial inclusion long before the term

emerged. The savings banks are rooted in the municipalities and rural districts of Germany, pro-

viding loans and financial services to local SMEs. Particularly striking is the fact that, while their

services (e.g. loans) are market-based and their operations commercially sustainable, they are

not profit-maximizers. Their mission is both social and economic — surpluses are used to support

social and cultural objectives of their communities.

A recent example of a community-oriented government intervention is the U.S. Treasury

Department’s Small Business Lending Fund (SBLF), enacted in 2010 as part of the Administra-

tion’s initiatives to facilitate recovery from the crisis. A $30 billion fund was created to provide

capital to community banks lending to small businesses. Since banks leverage their capital, it is

expected that ultimately lending to qualifying small businesses will generate several multiples of

the amount of capital injected. The SBLF was complemented by the State Small Business Credit

Initiative, which supports new and existing state programs to leverage private-sector financing

of small businesses.

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Linking Financial Inclusion with Larger Policy Goals

If finance is desirable to facilitate other ends such as investment, employment and growth, rather

than for its own sake, linking financial policy more explicitly to these larger ends makes sense.

For example, financial policy could be linked to industrial policy, providing SMEs in certain

industrial sectors with preferential access to credit or other support. In so doing, financing SMEs

helps to facilitate structural change and technological development, contributing to productivity

increases and economic transformation.28 In this way, financial sector strategy contributes not

only to successful businesses but also to a more dynamic process of economic development and

change. Governments in the high-growth economies of East Asia have pursued industrial policies

that call for a more active role for government in the development process than envisaged, for

example, in the Washington Consensus. Yet, such policies have met with some success.

Summary

To sum up, it is difficult to regard access to finance as a basic development objective on a par

with access to education or health. That is not to denigrate its importance, nor to deny that more

resources should be allocated to financial inclusion. But ultimately, financial inclusion and other

financial sector development policies should be regarded as means toward larger development

objectives rather than ends in themselves. Accordingly, the financial sector is best seen as an

essential “utility” in the modern economy that facilitates the efficient working of the “real”

economy. It does so by providing credit to businesses and individuals and providing other services

such as savings or deposit facilities that help households and firms manage their cash resources.

Public sector institutions and programs are a vital part of the financial sector in both

industrial and developing countries, as acknowledged by the background reports prepared by

for the G20. Their functions go beyond providing an enabling environment (or a financial infra-

structure) aimed at facilitating the efficiency of private sector actors. They also include a direct

role for government or public agencies in the provision of savings, credit and other financial ser-

vices. These may be effectively provided at the community, local or regional level rather than by

national institutions alone.

To be sure, there are instances where public-sector interventions in the financial sector

have not worked effectively — just as there are glaring examples of financial market failure

involving private sector actors. But the lesson from such experiences is not that public-sector

interventions are always doomed to failure. Rather it implies that the good practices of effective

public interventions should be emulated and bad practices shunned. Moreover, the public sector

can also work in partnership with private-sector actors (for example, through credit guarantee

programs) as well as in competition, to help to achieve maximum efficiency.

Finally, particularly since the effectiveness of financial sector policies is best gauged

through their impact on the real economy, a more coherent approach would involve linking finan-

cial policies to larger economic objectives, for example, via active industrial policies. This would

help to deepen the impact of both.

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Endnotes

1 CGIAR was established in 1971 as a strategic partnership among donors and 15 agricultural research centers working in collaboration with governments, civil society organizations and private businesses around the world. It is “guided by a vision of reduced poverty and hunger, improved human health and nutrition, and greater ecosystem resilience, brought about through high-quality international agricultural research.”

2 Financial repression refers to controls exercised by governments over interest rates or the allocation of credit, fre-quently through state-owned banks. It is believed that such controls undermine growth and development, and that liberalization would instead make the financial sector more efficient in mobilizing savings and allocating capital for productive investment. In the wake of the ongoing financial crisis, a certain degree of financial repression has found growing favor if it can restrain financial markets from excessive risk-taking and speculation.

3 AFI describes itself as “a global network of financial policymakers from developing and emerging countries working together to increase access to appropriate financial services for the poor.” The membership of AFI comprises central banks and other financial regulatory institutions (e.g. Ministries of Finance) from over 70 developing countries. AFI is entirely funded by the Bill and Melinda Gates Foundation, a private charity, and administered on behalf of its members by the German International Cooperation, a public federal enterprise whose sole shareholder is the German Ministry for Economic Cooperation and Development (BMZ). AFI works with its members to identify and promote “policy solutions” to increasing financial access. It also disseminates publications, convenes meetings and provides grants to members to promote financial inclusion.

4 Many of the fundamental hypotheses of the G20 financial inclusion initiative were first discussed in a policy report by the World Bank (2008), which was the first comprehensive treatment of the subject by the Bank.

5 Alliance for Financial Inclusion, “G20 Principles for Innovative Financial Inclusion.”6 Ashoka is a not-for-profit founded by Bill Drayton in Washington, DC in 1980. Its aim is to promote positive social

change by investing in social entrepreneurs with innovative, sustainable and replicable solutions both nationally and globally. It is financed by individuals, foundations and business entrepreneurs from around the world. Ashoka does not accept funding from government entities. Its budget in 2006 was nearly $30 million. “Changemakers” is an Ashoka initiative launched in 1994. It describes itself as a global online community to advance blossoming social innovations.

7 G20 SME Finance Challenge Press Release, Toronto, June 26 2010.8 Stein, Goland and Schiff (2010).9 Financial Inclusion Experts Group, “G20 Financial Inclusion Action Plan”, undated.10x25 May 2010.11 International Finance Corporation, November 2010.12 “Two trillion and counting: Assessing the credit gap for micro, small and medium-sized enterprises in the developing

world”, October 2010.13 Standard-setting bodies include the Financial Action Task Force, the Basel Committee on Banking Supervision, the

Committee on Payment and Settlement Systems, the International Association of Insurance Supervisors, and the International Association of Deposit Insurers.

14 G20 Financial Inclusion Experts Group (2010b), 84-85.15 G20 Seoul Summit Leaders’ Declaration, November 11-12 2010, paragraphs 55-57.16 IFC Press Release, Washington DC, November 12 2010.17 Annex II of the G20 Seoul Declaration.18 The other eight pillars comprised: Infrastructure; Human Resource Development; Trade; Private Investment and

Job Creation; Food Security; Growth with Resilience; Domestic Resource Mobilization; and Knowledge Sharing.19 The standard-setting bodies comprise the Basel Committee on Banking Supervision, the Committee on Payment

and Settlement Systems, the Financial Action Task Force, the International Association of Deposit Insurers, and the International Association of Insurance Supervisors.

20 In order to test this hypothesis it would be necessary to have time-series data on financial inclusion before and after the reforms. Such data do not exist—indeed, a principal focus of the initiative is to improve the coverage and quality of data on financial inclusion.

21 See Roodman (2012), Bauchet et al (2011), and Banerjee and Duflo (2009) for the latest evidence. These assess-ments reflect the fact that it was unrealistic to expect microcredit to transform the lives of beneficiaries or to dramatically reduce poverty. On the other hand, the assessments also conclude that microcredit has been successful in providing some households with opportunities and benefits that were previously unattainable—for example, the ability to invest in household enterprises, or in children’s education.

22 MFIs are said to be in the “semi-formal” sector since they operate within a rules-based framework that is less rigid than the formal sector but more explicit than the informal sector comprising traditional moneylenders or financial services made available through family or community ties.

23 World Bank (2008), 11.24 See also Collins et al (2009), who put considerable emphasis on how safer and more reliable savings facilities are

XIX

greatly valued by poor households in better managing their incomes.25 The goal of universal access to financial services was the principal theme of the World Bank’s major research

report, Finance for All: Policies and Pitfalls in Expanding Access (2008).26 The same point has been made in the context of the crisis in industrial countries, where deregulated finance has

become its own source of wealth-generation (and instability), leading to the remark that “finance should be the servant of the real economy instead of its master”.

27 See Chandrasekhar (2007).28 Lin (2011) is a key exponent of this perspective. It is important to note that at the time of writing Lin was Senior

Vice President and Chief Economist of the World Bank. See also Gibson and Stevenson (2011).

XX

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